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Bank forecasts pay packets boost

Households will finally see a real terms boost to their pay packets next year as wages growth accelerates and inflation dips below 1% for the first time in more than a decade, Bank of England forecasts suggested today.

The Bank's quarterly inflation report also appeared to cement the likelihood that families will benefit from continued low borrowing costs as interest rates are held at 0.5% until well into 2015 - though savers will continue to suffer.

Growth projections have been edged back slightly as Britain feels the effect of a slowdown in world markets and the "spectre" of stagnation in the eurozone.

But the continued rock-bottom cost of borrowing will still see gross domestic product (GDP) expand strongly by 2.9% in 2015, only slightly down from the previous expectation of 3%, according to the Bank.

The Bank expects the prolonged squeeze on pay, which has lagged behind inflation since 2008, to come to an end next year with real terms wages, currently flat, expected to grow by 2%.

Separate official data today suggested that on some measures wages were already starting to forge ahead of inflation.

The Bank's forecast for pay growth of 3.25% next year is unchanged from previous predictions but policy makers have revised the short-term path of inflation sharply downwards.

They had been expecting the Consumer Price Index (CPI) measure of inflation at 1.9% in the first quarter of 2015 but this is now pencilled in at 1%.

Governor Mark Carney said it was "more likely than not" that over the next six months he would have to write an open letter to the Chancellor to explain why the rate had fallen below 1%.

It would be the first time inflation has fallen below 1% since June 2002.

The Bank expects inflation to remain close to 1% for most of 2015 and not approach its target of 2% until late in 2017. Latest official figures for September show inflation already at a five-year low of 1.2% and October data will be published next week.

Sterling lost a cent against the dollar and the euro as the inflation picture was seen as strengthening the case for interest rates remaining on hold until the second half of next year.

Markets had earlier this year been forecasting a 0.25% rise as soon as this month but now see an increase not coming until the second half of next year. They have been held at 0.5% for more than five years.

The Bank said inflation had been kept down by lower food, energy and import prices, as well as the "drag" from an economy still lagging behind its full capacity despite the strength of the upturn.

Mr Carney said: "Although they are not permanent, the forces subduing inflation today are likely to persist for some time."

While low inflation eases the strain on household budgets, policy makers would be concerned were it to plunge too sharply as has happened in Europe where there are fears of a damaging deflationary spiral.

Separate figures from the Office for National Statistics (ONS) showed that the rise in the cost of living was by some measures already starting to be overtaken by pay.

Average weekly earnings were still growing at a below inflation 1% but regular pay excluding bonuses improved by 1.3% year-on-year and 1.6% in the private sector. For September alone, regular pay grew 1.8% year-on-year and 2.3% in the private sector.

Meanwhile, Mr Carney sounded a grim warning about Europe and warned that "considerable structural reforms" were needed to improve its performance.

Adapting the opening passage of the Communist Manifesto by Karl Marx and Friedrich Engels, he said: "A spectre is haunting Europe - the spectre of economic stagnation, with growth disappointing again and confidence falling back."

Mr Carney said the weakness in Europe, with growth consistently below 1%, was "troubling", with effects on the UK including a squeeze on exports.

But he said the Bank's guidance on interest rates - with future rises to be gradual and for the rate to remain low for some time - meant UK firms and households could continue to recover "without being overly troubled by foreign nightmares".

Mr Carney said the UK would continue to grow strongly "in the face of subdued world demand" thanks to the improving employment picture with 700,000 jobs created in the last year, plus consumer confidence, and strong investment.

However, the bullish tone on wages comes only three months after the Bank was forced to abandon its expectation of real term pay growth returning in 2014, after wage data was much weaker than expected.

Interest rates have been held at 0.5% since they were slashed in 2009 to help nurse the recession-hit economy back to health.

Mr Carney has said the recovery means the time for a hike is coming closer though his apparent changes of tone over when any rise will be have led to him being likened to an "unreliable boyfriend".

Howard Archer, chief UK and European economist at IHS Global Insight, said: "We are putting back our expectation of the first interest rate hike to August.

"Indeed, it currently looks very possible that the Bank of England could hold off from acting until around a year from now."

John Allan, national chairman of the Federation of Small Businesses, said: "Sustained low rates of inflation should delay any thoughts of a raise in interest rates.

"Although the report's predictions for European markets look gloomy, UK small business confidence remains high and this should continue to be supported by keeping interest rates low."

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